American’s New Flights Do Not Bode Well for the Phoenix Hub (The Pessimistic View)

Shortly after US Airways and American announced their merger in 2013, I made some predictions about what I thought would happen to the various hubs. So far, those have held up fairly well with a couple exceptions. I thought Dallas/Ft Worth would remain strong but possibly see a small haircut. I also thought LA would shrink down to serve just the local population on key routes. I was at least partially wrong on both counts, and that is generally bad news for Phoenix, the hub in between.

American’s announcement of new flights from DFW to smaller western cities only puts further pressure on Phoenix. I don’t worry about American leaving Phoenix entirely, because it’s a big local market where American does and will continue to do well, but I do worry about its ability to remain a hub. American had me talk to Vasu Raja, American’s Vice President of Planning, to understand why I shouldn’t be concerned, and that prompted me to do something different. I’m writing two posts on this with opposing viewpoints.

Yes, I’m aware you’re supposed to have different people write opposing views, but that’s no fun. I’m going to play both parts here. Let’s start with my initial reaction to American’s announcement this week, the pessimistic view.

To understand the dynamic for American in Phoenix, we have to look at what has happened in the two hubs on either side.

Squeezed From the Left

Step one in the “bad news for Phoenix department” happened right away after the merger. American decided to double down in Los Angeles and build up a massive operation to feed its Asian gateway. I couldn’t understand the rationale at the time, and I still don’t. But that doesn’t matter. It’s reality.

What matters for Phoenix is two-fold. First, there’s the issue that all this build-up in LA hurt secondary airports in the LA Basin. I’m a perfect example. Before the merger, I used to fly US Airways out of Long Beach via Phoenix to see the in-laws in Indiana. After the merger, I opted to drive to LAX and fly nonstop instead. (Yes, having children impacted this as well, but you get the point.)

All this growth in LA allowed people to overfly the Phoenix hub more frequently. It hurt in Long Beach where service was cut from 5 to 3 daily flights. And it likely hurt in Burbank, Ontario, Orange County, and Palm Springs as well. That may seem minor in the scheme of an entire hub, but it still has an impact. Every time you take out a flight from Long Beach, that’s 76 seats that are gone which could have connected to flights beyond Phoenix.

Second, this also creates connecting opportunities in LA that duplicate what exists in Phoenix (say, El Paso to Reno). That’s not a huge issue since LA’s schedule is built more for the local market, and in general, people hate connecting in LA. But it still is a piece of the puzzle.

Squeezed From the Right

What’s happening at Dallas/Ft Worth, however, is a bigger threat. At DFW, American did remain strong as expected, but then it put the pedal to the metal and started growing its way toward 900 flights a day. In particular, it has focused on boosting service to smaller cities with less competition using its newly-acquired regional gates over in Terminal E.

These are all markets that American flies exclusively from Phoenix 3 or 4 times a day now. (I’m excluding the miniscule yet apparently highly successful experiment this past summer to fly weekly from Flagstaff to DFW as well as LA).

Historically, the Phoenix hub has relied on markets like these to keep the hub going. All together, they flow a lot of traffic into Phoenix to connect beyond the hub, and those beyond flights will be hurt if traffic starts connecting at DFW instead.

Of course, these flights to DFW are only once or twice a day, but that’s still plenty to start doing damage in Phoenix. Here’s a basic example of how a hub can start to unravel. Keep in mind that this is just a random example and not based on actual numbers.

American flies twice a day from Phoenix to, say, Memphis, and it brings people in from all over the western US to fill those flights.

Now that smaller cities west of Phoenix have flights to DFW, some travelers will naturally start picking those connecting options to get to Memphis, bypassing Phoenix.

The Phoenix to Memphis flight suffers because there are fewer connections filling that flight, so it becomes unprofitable.

American cuts the Phoenix to Memphis flight, and the death spiral begins.

Now all the people who still connected from the western US to Memphis will stop flying via Phoenix since the Memphis flight is gone. The flights from the western US to Phoenix start to suffer and end up being canceled.

On and on it goes until everything fails and the hub implodes.

This is a worst-case scenario, and I should be very clear in saying that I don’t expect this is what will happen in Phoenix. Most importantly, Phoenix has a lot of local traffic and the costs of operating there are low. But this dynamic is real and is something to keep in mind.

Going back to that hub post I wrote in 2013, here’s what I said about Phoenix.

The last of the original America West hubs has also been rumored to be on the chopping block, but I don’t see that. Sure, higher costs will make some flights unprofitable, so capacity should shrink. But there is real opportunity in Phoenix as well.

Look at all the cities in the West that can be served by US Airways but not American. You have Long Beach, Burbank, Bakersfield, Oakland, etc. You also have some cities that are better served from Phoenix than LA. I think of places like Reno. With even more feed coming from the power of the combined airline, you have the chance to beef up service in these smaller cities and possibly add more. Places like Carlsbad may come back on the radar. And that can help with the rest of the operation. Sure, Southwest is good-sized, but its costs keep rising and this team knows how to compete with that airline. And Phoenix is the best option American will have to reach the smaller cities in the West.

I imagine Phoenix will initially contract, especially with frequencies in bigger markets, but I still see a good future.

Now that future appears cloudier. I’m not suggesting that the end is coming shortly, or that there will be a true end to the hub at all, but building up both DFW and LAX is going to have consequences for Phoenix.

Next week, I’ll flip sides and go with the optimistic vision for American in Phoenix.

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36 Responses to American’s New Flights Do Not Bode Well for the Phoenix Hub (The Pessimistic View)

CF,
As someone who lives in Austin I would rather connect in PHX than DFW for the ease of the connection (in my opinion DFW is a royal pain in the butt) and in the winter months to better ensure that I won’t be part of a snow or ice storm.

Bill – I’ll talk more about this next week, but I think Austin falls into an area that would still be in the domain on the Phoenix hub. The question is whether there’s enough traffic to justify the hub to continue.

Bill – You are just spoiled by that great little airport you have down in AUS. I live in DFW, so I think I only connected here once or twice, but with Skylink i just didn’t see the issue. In PHX, it seems like I always have to walk/hike/run half a mile to get to the gate. I can get from any AA gate to any AA gate in DFW in about 15 minutes. 20 if you could the new E gates. PHX runs about the same but with a lot more legwork.

I connect a lot of via LHR or CDG, and maybe my pain threshold is just so high due to those airports. MAD and FRA are great, long walks, but easy. I just dont see DFW being hard as a connection airport.

Now, to be fair, you are far from the first I have heard/read say this.

It’s no different than what occurred with STL. Granted, STL suffered a quicker death from the impacts of 9/11 but it appears as the same is happening for PHX.

The agents in both ORD/DFW were happy to have STL as a stress reliever for both hubs. As STL quickly shrank, it appeared ORD had a growth boom in departures.

Before STL was dehubbed, the concourses were always packed. If you didn’t have a prereserved seat, you normally ended up on the oversold standby list. Sadly, now you can wander blindfolded without fear of walking into someone during most times of the day.

I used to fly TWA a lot back in the 90s from Decatur, IL, which was served by I think TWA via STL and AA via ORD at the time. Lots of bumpy flights through midwest storms on those Jetstreams and Beechcrafts, but a 45 min flight on those 19 seaters made STL the gateway to the world.

I had occasion to be back in STL for the first time in many years a couple years ago, and I could hardly get my bearings, with the closure of B and D and the almost total lack of people.

I also grew up near Decatur – TWE had a nice operation with up to 8 flts a day to STL, while American Eagle then United Express/Great Lakes had 3-4 to O’Hare. It seems that most of the time we flew on UA/AA to ORD, it was for international connections whereas the TWE schedule allowed for connections to the entire TW network with only a 45-90 minute wait.

Once flights started getting cut, it made driving 45 minutes to Springfield more and more frequent since the connections to DEC were getting worse, yet SPI held on to nearly shuttle flights to both ORD and STL. As time progressed into the late 1990s, and MORE flights cut back, the longer layovers started to destroy the DEC market as it was only a 2 hour drive to Lambert (STL) vs 3ish to O’Hare – and most of the connections in either market were anywhere from 2 to 4 hours, making the DEC flights meaningless.

spiguy88 – It’s actually a fair bit different than St Louis which was a declining city with limited local demand. Remember, American’s whole plan was to save O’Hare for the local traffic and send connections via St Louis. At the time, connecting traffic was cheap and the hub was doomed. Today you have a different situation where connecting traffic can often be more lucrative. Phoenix is also a growing city with 2 million more people in the metro area than St Louis has. So right off the bat, the economics are better.

I get that being the pickle in the middle is not a good position but one could argue cities like SLC and DEN are similar. If you were saying that PHX is too close to LA and these western cities were going to be served via LAX and DFW exclusively I’d see your point, but you only mention DFW. By comparison then you can look at UA and DEN/ORD, which both serve many of the same cities. Ditto DL with SLC/MSP. You do say that Phoenix has plenty of O/D traffic so I think they’re just fine remaining a hub and AA is just providing more connectivity options.

The problem is that SFO – MSP – BIL has a lot of backtracking. Routings like that are why DL has use for their SLC hub. Same with DEN for UA. DEN, SLC, and PHX are all growing metro areas, so I really don’t see why an airline would de-hub those cities. DEN and SLC have the ability to connect north-south traffic as well.

You should add SBA to your smaller western cities. Had flights to LAX and PHX up to 2014. Then shortly after the merger discontinued all the LAX flights. So PHX was the only American flight out of SBA.

From MFR and RDM American currently has 1 flight daily to both PHX and LAX. If they add 1 more flight, would it go to one of those or DFW?

From a lot of smaller Western airports, Denver is the farthest east you can get. Flights to DFW (or ORD) are a game changer in terms of getting just about anywhere in just 2 flights. Phoenix doesn’t really do that.

Yup if you needed to go from, say, smaller West city to smaller East city, you probably need to double connect. Anyone who could figure out how to turn those journeys into a single connection would hoover up all that business. DEN and SLC do okay at this, but DL reaches a surprising amount of western cities from MSP, and from there you can get to a lot more of the east than from SLC or DEN.

Everyone seems to forget something very important- PHX has something that LAX will never have- over 45 gates. Due to a lack of gates, LAX’s is nearly maxed out for AA. Sure they may obtain a few gates in the future, but it will never have the connectivity that PHX offers. Since AA is all about connections, I believe PHX’s future is secure. On a personal note, I would never chose to change planes in DFW. PHX is super easy, delay free and user friendly.

The following numbers are from the “Fact Sheets” on American’s website (the newsroom page). As of August 2017, the Phoenix hub had 299 departures. As of May, 2018, the number was 268. Responding to another comment, you mentioned that you saw 235 departures. I realize the numbers on the fact sheets are probably averages, and departures vary depending on the time of day, the day of the week, and the time of the year. But based on the above numbers, it appears Phoenix has already shrunk a fair amount (especially if you look at the 299 and 235 numbers).

On a recent earnings call (1Q 2018, I think, but I could be wrong), a media member asked about Phoenix’s future. Doug Parker’s answer was quick and succinct. PHX is a domestic hub, and LAX is an international gateway; and the two are complementary, not competitive. Only time will tell what that means.

How many flights does it take to still be considered a viable “hub?” Beats me.

AA passenger traffic at PHX on a year over year basis was up about 5% from January to April. May to August, year over year traffic is roughly flat (some months slightly negative, some months slightly positive).

AA flexes the Phoenix market moreso than any of its hubs, so using departures in this case can be misleading.

However, it is possible that AA’s passenger numbers are skewed upward in peak months due to significant capacity adds to certain makets (Hawaii comes to mind). Nevertheless, the overall decline in departures is likely a harbinger of things to come.

The biggest warning signs I saw was a couple years ago when they started trimming daily N/S flights to several large cities such as MSP, DTW, STL. Yes, they connected dots to several small destinations, but with very limited frequencies.

Based on your numbers, it looks like Phoenix has become operationally more efficient. I live in the Phoenix area, and can tell you that this isn’t really the first choice of a place where people want to come in July, August or September.

I really don’t know what’s going to happen in the future. I was simply pointing out that the hub in Phoenix has shrunk already. The Phoenix metro area is quite a bit larger than Pittsburgh, Cleveland or St.Louis, former hubs to which it’s often compared. And, it’s growing, not losing population. Phoenix is the 5th or 6th largest city in the country (neck and neck with Philadelphia) and the 13th largest metropolitan area. The population in metro Phoenix is larger than the states of North Dakota, South Dakota, Wyoming, Montana and Idaho combined.

As for geography, while Phoenix appears to be in an inferior position, it isn’t if one considers population. The southern tier of states has a far greater population than the northern tier. The two largest cities between the Twin Cities (MSP) and Seattle are Boise, ID and Spokane WA. Tucson, Arizona has twice the population of those two cities combined, to say nothing about Albuquerque, San Antonio, Midland-Odessa, Austin, El Paso, Lubbock, etc. which are at least as large as Spokane and Boise, and some are far larger. Like Denver, Phoenix is a big enough market that it can handle two large airline operations, and has for many years.

None of this means that Phoenix will continue to be a hub for American. None of it indicates that Phoenix will be dehubbed either. The economics will determine that, and we don’t have nearly as much information about that as the airline itself.

Some thoughts for the optimistic view: AA is likely thinking about how to re-purpose some hubs. According to Diio Mi, Q4 seat capacity is up 1% in PHX. Sure, this pales in comparison with LAX (up 8%) or PHL (10%), but it’s still growth. Contrast that with MIA (flat) and LGA (down -2%) and you can see that AA is tinkering.

Also, consider the widebody flights to HNL introduced last winter (coming back this winter) and next summer’s first LHR nonstops, both signs that AA is looking to treat PHX as a “grown-up” and not a regional connector.

Rob B – Indeed, Phoenix saw its big cuts before when there was a mass downgauging from A321s to 737-800s. Frequencies were trimmed, but it was more about finding the right capacity. But I don’t see American’s other moves as being all that indicative of a big commitment to Phoenix.

Take the widebodies… AA just has too many of them. I mean, when you’re flying double daily 787s from DFW to Vegas, you have too much widebody capacity, especially outside of the summer peak. So if it can put a widebody in PHX to fly to Hawai’i, then it’s probably going to do better than it would elsewhere. Look for even more widebodies in PHX this winter.

Then there’s London. BA was already going to be flying a second flight next summer, but the two airlines opted to have American fly it instead.
There is more frequency than what BA had planned, but BA’s 747s have more seats. So it’s not really a big change. It’s more of a joint decision between the two to best deploy the aircraft.

I’ll be starting 2019 by flying home into Long Beach from the East Coast via Phoenix, but this will be only my 2nd time using Phoenix for a Long Beach connection in more than 10 years of living in Long Beach. On the outbound for this trip I would have liked to do the same (there was a well-timed connection), but at $100 more than a nonstop from LAX, multiplied by 5 people, I chose to fly from LAX instead. So while it would be sad to see American cut LGB–PHX, it’s a service that so far hasn’t been too useful to me.

Now if LGB–PHX on American goes away, what happens to the slots in Long Beach? Will American try serving Long Beach from DFW? Or will they give up completely, allowing the slots to be picked up by Southwest, who may well decide to serve Phoenix?

Comparisons of AA at PHX vs DL at SLC vs UA at DEN need to consider that
– AA and UA are not the dominant airlines by local passengers carried at their hubs in Phoenix and Denver respectively. DL is the dominant airline at Salt Lake City.
– While SLC is the smallest of the 3 mountain/southwest hubs in terms of local market revenue, it also generates the highest average fares. DL gets 190% of the WN average fare at SLC compared to 185% of what UA gets at DEN. AA gets 150% of WN’s average fare at PHX.
– AA’s average fares from PHX are a lower percentage of DL or UA’s average fares from the hubs on either side of their mountain/southwest hubs (ie AA at PHX vs. LAX/DFW, DL at SLC vs. LAX/SEA/MSP, UA at LAX/SFO vs. ORD).
– DL at SLC and UA at DEN have more longhaul international service than AA at PHX.
A certain amount of hub flow duplication happens with any airline that has more than one hub – but the economics of the hub are driven more by the amount of local revenue the hub generates than any other factor. AA’s hub at PHX is a higher volume/lower fare hub than DL at SLC and UA at DEN which dramatically reduces the revenue potential of the overall hub and increases the cost of handling connecting passengers relative to the total cost of the hub which includes local market revenue.

UA’s DEN is not even remotely in the same league as DL’s SLC. Come back to me when DL is faring meaningfully higher than Alaska at SEA, then we’ll talk Until then, you’re just pretending to use data but a troll nonetheless.

even though American will over fly PHX on some new routes out of DFW, there must be enough traffic to sustain American addingLHR and BA already. the new flights had to be in the pipeline when American announced LHR….DFW is a nightmare now operating out of all the terminals and when those extra gates open in terminal E(going to 15 gates) its going to get worse….the sky link can only go so fast so if you land at E and have to get to B, thats going to take some time especially if your late arriving into DFW….PHX is an easier connecting point, no train and LAX is huge and Im always delayed going into or out of….last week I flew IAH to LAX and we were delayed by 30 min due to LA traffic….that seems to be the norm everytime I fly to LAX(7-8 times a year)…do you think people will choose PHX over DFW due to PHX being smaller, less congestion and not having to take a train to get to a gate,….putting to many eggs in one basket will be a nightmare if there are any weather delays and DFW has had its share this year…..

Also UA is beginning to encroach on AA’s PHX hub territory in Northern Arizona with new UA Express flights to DEN from Flagstaff and first ever commercial service out of Prescott to DEN and LAX next year. That will be a nice alternative for me who lives in the Show Low / Pinetop-Lakeside area to go to Flagstaff which is only 2.5 hours away versus the 3-3.5 hour drive to PHX and all of the hassle with going there.

Within the past year, American added routes from PHX to MSN, GRR, LHR, OKC – all of which all over fly DFW. Using your logic above means that these new route additions do not bode well for the DFW hub.